2009-12-24

Until I can actually see the latest health reform legislation without painstakingly redoing the work that our Senators and their staff have already done for us, on our dime—valiantly and tirelessly, I might add, but on our dime nonetheless—let’s take a look “risk pools.”

So what is a “risk pool” and why would you want to swim in it? I know, it sounds risky, but chances are you’ve got prune hands from being in one so long already, so don’t be too scared.

A “risk pool”, very generally, is a group of people paying premiums into an insurance plan and who are entitled to some benefits from the plan. Generally, the larger the pool, the larger the amount of total money available to an insurance plan to pay for health care for the people who pay premiums, and the less each person has to pay into it.

You may also see the term “high risk pool” being bandied about. It is a “risk pool”, but for people who are at a high risk to spend a lot of money on health care. (Some sources equate the terms “risk pool” and “high risk pool”, but I am not doing that here.)

To use a very loose analogy (and perhaps taking too many liberties with the word “pool”), a regular risk pool is like an Olympic-sized swimming pool located in southern Florida, where it doesn’t take much energy to keep it nice and comfortable (heating, filtering)—let’s call the energy costs “premiums”. So, everyone who swims in it chips in a little bit to keep the pool comfortable; that is, except for the uninsured, who hop the fence and do cannonballs into it, but we’ll get to them.

A “high risk pool” is like a hot tub: It is smaller, and it may take a similar amount of energy to run and heat as compared to the bigger pool, but it can hold fewer people, so fewer people can chip in. Thus, it’s more expensive per person.

Seems fair, right? You want a hotter pool with bubble jets and such, you have to pay more.

The conventional wisdom has been that high risk pools are fair to the general population because the high risk people pay higher premiums to help compensate for the amount of health care expenditures they incur. Sounds great if you’re in the regular risk pool; not so great if you’re in the high risk pool. The problem is that this (generally) is not equitable in the health care arena. Whereas some people might choose to pay more for hot water and bubble jets, no one chooses to be born with a congenital heart defect or Type I diabetes, and that’s where the “hot tub”/ “big pool” analogy breaks down—the big pool is just as good for people with heart defect and diabetes as for everyone else, so we’ll assume (for the purposes of this discussion) that everyone goes into the big pool.

I won’t get into the grey areas that include obesity or smoking (or other similar health hazards caused by genetics and free will in varying unmeasurable degrees) or other issues such as paying for health care for illegal aliens—they’re not really relevant at this fundamental a stage of the discussion.

Back to the pool. Think of a mandate to purchase health insurance like going to a big pool used by a bunch of different swim clubs. But imagine that everyone must swim at some point and that you need to join a swim club before you can jump in. Some clubs offer different services (fresh towels, swim lessons, sunscreen, babysitting, free use of kick boards), and some are pretty bare-bones, (e.g., they'll pull you out if you start drowning), but everyone pitches in to use the pool. Just as with health insurance, some plans offer annual physicals, nutritrional counseling, and discounted gym memberships, whereas others just pay for you to get your hand sewn back on after a horrific accident.

Some people might never plan to go into the pool, just like some people (e.g., Christian Scientists, devout Rastafarians) might not plan to use the health care system. But the risk pool system breaks down unless everyone belongs to a swim club/health insurance plan—someday they or someone they care about is almost certain to go for a swim, voluntarily or not. One reason health care insurance premiums are so high is that not everyone has insurance. This wouldn’t be a problem if the uninsured didn’t use the health care system, but in the U.S., the uninsured use the system all the time, and often don’t pay for the privilege, so the cost gets passed on to the people who have insurance. This is not the place to get into why or how much, but I’ll lay out some of the consequences below.

So what happens if you put everyone in the same pool? For the most part, peoples’ insurance premium costs go down. There are a few people who will pay more (typically, those who are currently uninsured or underinsured), but generally, because everyone is pitching in, the per-capita cost goes down. If you understand fractions, you’ll see why very quickly.

5/4 > 5/5 (or for the fractionally deficient: 1.25 > 1.0)

That is, if 5 people use health care, but only 4 pay for it, those who pay must pay 5/4ths of what their care actually cost to keep the system solvent. If 5 people use health care and all 5 pay for it, then everyone only needs to pay for 5/5ths. So, before you whine about being “forced” to buy “universal” coverage, ask yourself: “Would I rather pay $1.25 in insurance premiums or $1.00”? Assuming you’re a rational person, it would be the latter, right?

That said, at the risk of demonstrating why lawyers shouldn’t be allowed to play with numbers, below is an illustration of what would happen if the uninsured were able to get insurance and start paying premiums (whether on their own or through a subsidy scheme) in Texas, which, as of 2008, had the highest proportion of uninsured people of any State (including DC) in the country.

The latest year for which data are available for all States is from 2004. Looking at the overall numbers shows how (sadly) dated the data are: Total national health expenditures in 2004 were “only” about $1.55 trillion (that is, $1,551,261,000,000.00) and Medicare expenditures were “only” about $303 billion (that is, $303,462,150,000.00). As of 2007, they were each roughly 40% higher.

Major assumptions: 1) The uninsured, once they obtain insurance, will use care at the same rate they do now (an arguable proposition, given that they may be using less acute care and more preventative care); 2) The inference of the number of uninsured people was taken from percentages in a 2007-2008 survey—the assumption is that the percentage of the population that is uninsured has not changed between 2004 and 2008. (Although this assumption likely does not hold true for Massachusetts because of its recently implemented universal coverage system); 3) a “medical loss ratio” of 85% (taken from § 102 of H.R. 3962.PCS), that is, 85% of premiums collected are used to pay for health care; 4) the "premiums" below may be a bit off, because for the sake of simplicity, deductibles and coinsurance/copayments were not considered, so this assumes that insurance covers 100% of all medical expenses, but for a person who satisfies their deductible and pays 15-20% coinsurance, the out-of-pocket expense would likely be similar; 5) even if people are paying money into different pots, if everyone is insured, it acts effectively as a unified risk pool on a per-capita basis—the currently uninsured don’t choose which insurance company to bill their expenses to, so the assumption is that the costs are currently evenly spread across all the insured; and 6) smaller risk pools are generally more expensive per capita, but without data on risk pool sizes (e.g., number of insurance companies in each State, and number of people each company insures and sizes of their respective risk pools), it’s not possible to work out the advantage of a Statewide pool vs. the current situation for those in high-risk pools, rather only 100% coverage vs. current overall coverage rates, thus, the 100% coverage rate insurance premium projection is based upon a single Statewide risk pool because no other data are available (to me, that is).

Note that the illustration is extremely simple in that it does not take into account possible benefits of 100% coverage such as improved economies of scale or reduction in acute care utilization, nor does it account for self-insurance (personal or organizational), possible increased overutilization, medical expenditure inflation, the potential overlap (double-counting) of non-elderly Medicare beneficiaries, or Medicaid (which is likely to be supplanted in large part by premium and cost-sharing subsidies in what I’ve been able to glean from the leading health care legislation). At a fundamental level, the illustration below roughly shows that 5/4 > 5/5, but it looks somewhat more impressive when you plug in the real numbers. That said, let’s proceed.

Using currently available data and the above assumptions (with the above caveats), here’s a comparison between Texas now, and what Texas would look like with everyone (everyone who’s not in Medicare, that is) in the same risk pool:

As you can see, the total amount of insurance premiums would not change, but the distribution of the expense would.

“But isn’t this unfair to those who can’t afford insurance”? Well, if insurance becomes roughly 28% cheaper, it probably will be somewhat more fair. Furthermore, the most recent version of meaningfully published legislation would offer some help to those people who truly can’t afford it. See §§ 341–347 of H.R. 3962.PCS.

The spreadsheet used for the calculations above is available upon request; I may post it or a link to it in the near future. It shows considerably more data, including some interesting projections on what would happen with a nationwide risk pool, but which I’ll summarize below:

1) Using the assumptions above, insured people every State (plus DC) would be better off with full coverage and a Statewide unified risk pool as compared to the current situation.

2) With a nationwide unified risk pool, people living in 22 States would likely be worse off financially in the short run as compared to a Statewide risk pool—28 plus DC would be better off.

3) Only the insured folks living in Utah and Arizona would be better off in their current situation as compared to a nationwide risk pool with full coverage, meaning that for 48 States and DC, a unified nationwide risk pool with full coverage would likely result in lower premiums than people pay now.